Buy Before You Sell Mortgage Options
When you find your dream home and need to buy it before you sell your existing home, to avoid missing out, there are three mortgage products you could use to facilitate this. These options include:
- A Let to Buy mortgage
- Buying a second property and keeping the existing property
- A Bridging Loan (or Bridging Finance)
What is a Let to Buy Mortgage?
The first option is to convert your standard mortgage into a Buy to Let mortgage, which is known as a Let to Buy mortgage. This means that you can let your existing home out to tenants, utilising the rent payments to repay your existing mortgage.
It’s a fairly simple process to convert your current mortgage into a Buy to Let mortgage. It’s important to realise that once the mortgage has been converted, the property will no longer be residential, so you cannot live in it yourself.
The benefit of this option is that you have more time to think about whether or not you want to sell the property, rather than panic selling it and possibly accepting a lower purchase price than you’re happy with. It can also relieve pressure on the property chain, as it takes your property out of the equation. With an average of three out of every ten houses in a chain falling through, this can reduce a lot of the stress of moving home.
Will you need a deposit for your Let to Buy mortgage?
As you are essentially remortgaging your property, a new application will be made and you will need to provide a deposit. Ordinarily, this will be taken from the equity in your home, but you can offer it as cash if you’re in a position to do so.
To change your mortgage to a Let to Buy, you will usually need a minimum of 25% equity in the property, lenders are unlikely to offer Let to Buy mortgages at a higher loan to value rate than 75%.
What is a second home mortgage?
You can keep your existing mortgaged property and buy a house to live in as your main residence. To do this, you would have to prove that you could meet the affordability requirements of running both homes.
If you can afford both homes even for a short period of time, this gives you the option of buying a new home straight away and eventually selling your home, perhaps if it increases in value or should you need it due to a reduction in your income.
Is there anything to consider with a second home mortgage?
With second home mortgages is the loan to values rate that you would be able to borrow. If you’ve got an existing mortgage, lenders usually only offer up to 75% loan to value of the property. This means that you would need to find a slightly higher deposit than you needed for your first mortgage.
What is a Bridging Loan?
Bridging loans are short term finance that are secured on a residential property. It can be quite an expensive way to purchase a property you want to buy before you’ve sold your existing property. As such, it should be a last resort for most people.
The interest rates are set a lot higher than on a normal sort of residential mortgage or Buy to Let mortgage and it’s charged on a daily rate. Arrangement fees will range between 1% and 2% of the cost of the loan, dependent on the individual lender.
Bridging loans are for a maximum of twelve months for a residential property. This is classed as a regulated bridging loan. Unregulated bridging loans can be up to twenty four months, however, they are not generally used in these circumstances. To obtain a bridging loan, you will need a minimum of 25% equity in your current home.
The short duration of bridging loans can be restrictive, especially if you don’t manage a quick sale, because you will still need to pay off the loan. On top of the actual loan repayment you will also have the compounded interest which has rolled up for the last twelve months. With bridging loans, you are unable to pay off the interest monthly, so the final payment is much steeper than what you borrowed. There are often also exit fees if you are able to pay the loan off early.
An exit strategy is key
As bridging loans are not assessed based on income (the loan is secured on the property itself), it can be easier to obtain than the other options, so where there is a good exit strategy, it can provide an option for those in certain circumstances.
An example of a good exit strategy may be that you add value to the property within the twelve months and put the house on the market at a higher value in order to pay back the bridging loan, then organise a remortgage with a different lender.
What should the first step be?
Contact a Mortgage Broker that is experienced in dealing with this type of situation. It can be stressful and a very complex process to move home before you have sold your existing property. Ensuring that you have clear advice from people who deal with these types of mortgages daily, can give you peace of mind that you are making the best decision for your circumstances.